British economic history warns us to beware false dawns. Those calling for spending cuts have got it wrong – again
‘The duration of the slump may be much more prolonged than most people are expecting and … much will be changed both in our ideas and in our methods before we emerge. Not, of course the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase.” John Maynard Keynes‘s lucid warning, delivered in 1930, might equally apply today.
It is instructive to look at the pattern of the great depression. The level of Britain’s gross domestic product in 1930 was not reached again until 1934. The annual unemployment rate of 1929, 8.2%, was lower than in every year during the 1930s, reaching a high of 17.6% in 1932. Today, we are probably out of the acute phase of the present recession, but the recovery is likely to be protracted.
Output for the first quarter of 2009 was revised down to -2.4%. That is the biggest drop since 1958, as the Office for National Statistics revised its initial estimate of 1.9%. In addition, the fourth quarter of the 2008 figure was revised down to a fall of 1.8% – as was the figure for the second quarter of last year, from zero to -0.1%, meaning the recession started in April 2008. Data from the Index of Production published this month also suggests little evidence of any recovery. Manufacturing output continues to decline and is at a 17-year low.
The 1980s recession began in the first quarter of 1980, and lasted for four quarters. The unemployment rate at that time was 5.8%; it did not return to that level for 20 years. From the third quarter of 1990 onwards, the economy recorded five successive quarters of negative growth. In the second quarter of 1990 unemployment was 6.9% and did not return to that rate for seven years.
And the current slump? Employment peaked in April 2008; since then Britain has lost 430,000 jobs. That unemployment has increased more than employment has fallen is of particular concern, because it shows that firms have stopped hiring, which particularly affects the young.
So, based on output, employment and unemployment, the recession started in the spring of 2008. We have already experienced four quarters of negative growth, with more to come.
Economists are uncertain about the likely path of recovery. For example, less than a year ago Britain’s National Institute of Economic and Social Research was predicting that the UK economy would “escape recession”, forecasting positive economic growth in both 2008 and 2009. On 10 June this year, the NIESR said, “The monthly profile points to March as having been the trough of the depression.” But on 7 July it had changed its mind again, arguing, “March can no longer be considered the trough of the recession.” A month is a long time in economics these days.
I continue to be struck by the similarities between the US and the UK. The American National Bureau of Economic Research called the start of the recession in the US when employment began falling in December 2007. Since that time US unemployment has increased by 7.17 million, whereas employment has fallen by only 6.46 million. The unemployment rate has risen from 4.9% to 9.4%.
The US is six quarters into recession. Despite a substantial fiscal stimulus and very accommodating monetary policy there is little sign that recovery is imminent. There have been several false dawns. The monthly decline in US payroll employment, for example, slowed in May but increased again to 467,000 in June. The Conference Board’s consumer confidence index, which had improved considerably in May, fell again in June. The job outlook section of the index was also more pessimistic. Those respondents anticipating more jobs in the months ahead decreased to 17.4% from 19.3%, while those anticipating fewer jobs increased to 27.3% from 25.6%.
The Bank of England’s timid monetary policy committee should not have sat on its hands last week; it should have expanded further its programme of quantitative easing. In the current circumstances, if we are to avoid the “dragging conditions of semi-slump”, public spending cuts make absolutely no sense. The government should be increasing spending now – and by a lot – not least because it can borrow at such a low long-run rate of interest. In such circumstances, infrastructure and education are smart investments for all our futures. Most of the self-proclaimed experts calling for public spending cuts missed the recession in the first place.
So I have a question for Gordon Brown, David Cameron and Nick Clegg. What plans do you have to get unemployment down any time soon? If you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes. Voters want jobs.
David Blanchflower is a professor of economics at Dartmouth College and a research associate at the NBER. He was a member of the Bank of England’s MPC from June 2006 to May 2009
And next for Britain, the semi-slump
British economic history warns us to beware false dawns. Those calling for spending cuts have got it wrong – again
‘The duration of the slump may be much more prolonged than most people are expecting and … much will be changed both in our ideas and in our methods before we emerge. Not, of course the duration of the acute phase of the slump, but that of the long, dragging conditions of semi-slump, or at least sub-normal prosperity, which may be expected to succeed the acute phase.” John Maynard Keynes‘s lucid warning, delivered in 1930, might equally apply today.
It is instructive to look at the pattern of the great depression. The level of Britain’s gross domestic product in 1930 was not reached again until 1934. The annual unemployment rate of 1929, 8.2%, was lower than in every year during the 1930s, reaching a high of 17.6% in 1932. Today, we are probably out of the acute phase of the present recession, but the recovery is likely to be protracted.
Output for the first quarter of 2009 was revised down to -2.4%. That is the biggest drop since 1958, as the Office for National Statistics revised its initial estimate of 1.9%. In addition, the fourth quarter of the 2008 figure was revised down to a fall of 1.8% – as was the figure for the second quarter of last year, from zero to -0.1%, meaning the recession started in April 2008. Data from the Index of Production published this month also suggests little evidence of any recovery. Manufacturing output continues to decline and is at a 17-year low.
The 1980s recession began in the first quarter of 1980, and lasted for four quarters. The unemployment rate at that time was 5.8%; it did not return to that level for 20 years. From the third quarter of 1990 onwards, the economy recorded five successive quarters of negative growth. In the second quarter of 1990 unemployment was 6.9% and did not return to that rate for seven years.
And the current slump? Employment peaked in April 2008; since then Britain has lost 430,000 jobs. That unemployment has increased more than employment has fallen is of particular concern, because it shows that firms have stopped hiring, which particularly affects the young.
So, based on output, employment and unemployment, the recession started in the spring of 2008. We have already experienced four quarters of negative growth, with more to come.
Economists are uncertain about the likely path of recovery. For example, less than a year ago Britain’s National Institute of Economic and Social Research was predicting that the UK economy would “escape recession”, forecasting positive economic growth in both 2008 and 2009. On 10 June this year, the NIESR said, “The monthly profile points to March as having been the trough of the depression.” But on 7 July it had changed its mind again, arguing, “March can no longer be considered the trough of the recession.” A month is a long time in economics these days.
I continue to be struck by the similarities between the US and the UK. The American National Bureau of Economic Research called the start of the recession in the US when employment began falling in December 2007. Since that time US unemployment has increased by 7.17 million, whereas employment has fallen by only 6.46 million. The unemployment rate has risen from 4.9% to 9.4%.
The US is six quarters into recession. Despite a substantial fiscal stimulus and very accommodating monetary policy there is little sign that recovery is imminent. There have been several false dawns. The monthly decline in US payroll employment, for example, slowed in May but increased again to 467,000 in June. The Conference Board’s consumer confidence index, which had improved considerably in May, fell again in June. The job outlook section of the index was also more pessimistic. Those respondents anticipating more jobs in the months ahead decreased to 17.4% from 19.3%, while those anticipating fewer jobs increased to 27.3% from 25.6%.
The Bank of England’s timid monetary policy committee should not have sat on its hands last week; it should have expanded further its programme of quantitative easing. In the current circumstances, if we are to avoid the “dragging conditions of semi-slump”, public spending cuts make absolutely no sense. The government should be increasing spending now – and by a lot – not least because it can borrow at such a low long-run rate of interest. In such circumstances, infrastructure and education are smart investments for all our futures. Most of the self-proclaimed experts calling for public spending cuts missed the recession in the first place.
So I have a question for Gordon Brown, David Cameron and Nick Clegg. What plans do you have to get unemployment down any time soon? If you want to transform a recession into a depression, go ahead and cut public spending. I would advise against it and so, I believe, would John Maynard Keynes. Voters want jobs.
David Blanchflower is a professor of economics at Dartmouth College and a research associate at the NBER. He was a member of the Bank of England’s MPC from June 2006 to May 2009